No Jail? Cool – We’ll Keep Stealing!

Employees have been front-running client orders and rigging WM/Reuters rates by pushing through trades before and during the 60-second windows when the benchmarks are set, said the current and former traders, who requested anonymity because the practice is controversial. Dealers colluded with counterparts to boost chances of moving the rates, said two of the people, who worked in the industry for a total of more than 20 years.

The behavior occurred daily in the spot foreign-exchange market and has been going on for at least a decade, affecting the value of funds and derivatives, the two traders said.

It’s controversial to front-run and rig rages, right?

Controversial?!

Oh, and before someone says “that’s an isolated incident” the allegation is made that this occurs daily and has been going on for at least a decade.

Being in possession of a client order and trading in front of it is the classic definition of front-running, and is supposed to be illegal. Note however what the objectives are claimed here:

One trader with more than a decade of experience said that if he received an order at 3:30 p.m. to sell 1 billion euros ($1.3 billion) in exchange for Swiss francs at the 4 p.m. fix, he would have two objectives: to sell his own euros at the highest price and also to move the rate lower so that at 4 p.m. he could buy the currency from his client at a lower price.

That’s nice.

The FX market has long been a snakepit; back in 2010 I wrote a couple of article in which I pointed out that the common perception that FX trading is “commission-free” is utter crap. Pip spread and rollover is in fact a commission — just a hidden one — and unlike in the stock and futures markets where the bid and offer are entered by people (and not allowed to be crossed by the broker himself) in the OTC FX market you have absolutely no idea who is trading against you. Worse, “rollover” effectively can (and frequently does) charge you a commission to hold a position, where with stocks and futures you’re charged to trade, but holding a position doesn’t have a continuing cost (other than holding open a short on a stock, which may have a borrow expense.)

This, in my opinion, makes retail FX unsuitable for all but daytraders who have an extremely high tolerance for risk and who intend to hold positions only for very short periods of time as the embedded and recurring costs are extremely high compared to other instruments.

But this goes further — the allegation here is that the “market” is being actively rigged to screw customers — and the FX market runs more than $4 trillion in transactions daily.

One of the oldest scams in the banking industry was to scam off a tiny fraction of the interest payments due to customers. This is pretty tough for a customer to catch, even today with computers, since continuous compounding makes it difficult for the customer to replicate the exact computational stream that the institution is using to check its work. The customer in many cases never notices they were robbed — but robbed they were.

In a $4 trillion+ daily flow stealing even a single basis point (1/100th of a percent) results in a huge amount of money (millions) being illicitly siphoned off each day.

These sorts of schemes will not stop so long as we refuse to prosecute and imprison not just the “little guys” but also the executives involved who, of course, love the “profits” their firms make, directly and indirectly, from such practices.